When you go to a store to buy a soda, you expect to be able to get it in a can or a bottle. But when the store owner buys sodas from a supplier, they order them in packs or boxes. It’s all the same item, a soda, but the units of measure are different. The fact that many items are bought and sold in other units is one of those things that you don’t usually think about — unless you are in a business where it’s necessary. That is why it is so important that an ERP system can handle different units of measure.
What is a Unit of Measure (UOM)?
A unit of measure (UOM) describes how the quantity of an item is tracked and managed; common units are ‘each’, ‘piece’, ‘pack’, ‘meter’, gallon’, and ‘pallet’. Typically, items can be bought, made, stored, costed, transported, and sold in different UOMs. Therefore, not only must a system support different UOMs, but there needs to be a standard for converting one UOM to another.
UOMs are usually categorized according to their purpose.
- Inventory: quantifies stocked items in terms that stakeholders understand
- Cost: used to calculate inventory costs
- Manufacturing: used to handle manufactured items and component quantities in the production process, such as in a Bill of Materials (BOM)
- Purchasing: the UOM in which an item is purchased from a supplier
- Sales: the UOM in which an item is sold
Where are Units of Measure (UOM) used?
There are several use cases for UOMs
- Food manufacturers that have the product in different-sized containers, e.g., beer sold in single bottles (each), packs of 6, or cases.
- Another UOM is ‘catch weight’. This is where producers or distributors sell a product by weight; each product’s weight can vary, i.e., it is not a standard weight. An example is a business selling chicken, where each chicken piece must be sold by its weight rather than a fixed price.
- Businesses that buy and sell in different units. For example, a fabricated metal manufacturer buys steel in sheets (meters) but cuts and delivers it to customers as pieces of steel; the same product is sold differently from how it was purchased.
How an ERP supports Units of Measure (UOM)
How an ERP system handles a UOM is essential. Each different size should not be classed as a different product or SKU. Instead, the item in inventory should be the primary product, and packaging variations should be a secondary consideration.
- Perfect order fulfillment: Providing a customer with a product in the quantity and packaging they want contributes to perfect order fulfillment, and handling multiple units of measure enables that. In addition, special pricing deals can be set for certain UOMs to encourage customers to buy items in those units.
- Accurate costing and pricing: Selling by different UOMs enables a more accurate costing and pricing of products.
- In Bill of materials: With multiple UOMs, a manufacturer can use the unit that a particular business function wants. For example, production may measure steel output in meters, warehousing wants to count it in rolls, and accounting costs it by tons. In the manufacturing process, the Bill of Materials may stipulate a specific UOM.
- Multiple UOMs: With an ERP system that enables various UOMs, items in the warehouse can be stored in different locations depending on the unit, e.g., ‘eaches’ in bins and cases in Warehouse A. In addition, inventory valuation is made much easier with UOMs as each UOM can be costed instead of converted to a base unit for calculating inventory value.
- Procurement flexibility: Support for different UOMs allows procurement to order items in the unit a vendor requires for a purchase quantity. The importance of conversion then comes in when converting purchased quantities into stock and sellable quantities. In addition, analyzing purchasing history can help make informed decisions about the UOMs to buy next.
Using UOM in ERP
Configuring UOMs in ERP allows for flexibility, including defining business-specific UOMs and their conversions. However, defining UOMs should be treated with the same care and attention as the Chart of Accounts. It is a critical aspect of an ERP implementation. A badly configured UOM will impact performance and efficiency. Conversely, properly configured and used, UOMs give manufacturers more significant opportunities for cost savings in warehousing and procurement, improved customer service, and improved performance.